Archive for the ‘Haircut’ Category

“If past history was all there was to the game, the richest people would be librarians” Warren Buffett

Last week, there was a preview blogpost for NAMA in 2012 which is the future where riches lie, and this is the librarians’ review of NAMA in the past 12 months, divided by month.

January 2011

In December 2010, the NAMA CEO and the Financial Regulator were each doing their damnedest to pass the buck for the iffy information provided by the banks to NAMA and its advisers in mid-2009. The NAMA CEO had characterised the information provided by the banks as touching on fraud. The Committee of Public Accounts wanted to pin down the culprits for NAMA getting its initial business plan so wrong. So it hauled Brendan and Frank back on 14th January to explain themselves. Sadly the committee was not equipped to closely question the pair, and it remains the case to this day that no-one has been held to account for the poor quality of the draft NAMA business plan. Separately speculation about NAMA’s acquisition of sub-€20m exposures at AIB and Bank of Ireland intensified as the Fianna Fail/Green coalition teetered on its final legs and a general election was announced by Taoiseach Cowen in the Dail on 20th January; on 24th January, the NAMA Amendment Bill was published, and was promptly binned a month later; surely AIB’s lobbying of the Department of Finance had nothing to do with the decision. NAMA was in the courts to stop a property on Kings Road in Chelsea in London being transferred by Thomas and Patricia Joyce to their children. It was revealed that a solicitor on NAMA’s legal panel, Brian O’Donnell was being pursued for €69m by Bank of Ireland; although the story had a whiff of scandal about it, NAMA was quick to say that no work had in fact been given to this solicitor. On 24th January, it was announced that David and Frederick Barclay had bought into the Maybourne group of hotels. On 25thit was exclusively reported here that NAMA was overseeing the sale of the Montevetro office building in Dublin to Google. Not for the first time, Kerry senator, Mark Daly made accusations about NAMA’s disposal of assets; he appeared on the Pat Kenny radio programme but steadfastly refused to provide details which would allow his claims to be investigated.

February 2011

Paddy McKillen, the property investor (or “developer” if you want to rile him) achieved a score draw at the Supreme Court which ruled that NAMA was indeed required to consult with him before acquiring his loans, and that NAMA’s decision to acquire his loans before the Agency was legally created was flawed. It was a draw because the Court ruled that NAMA had the right to acquire his loans. Despite the 2-2 draw by reference to the issues considered, NAMA ended up with a legal bill estimated at €7m ( NAMA keeps batting away specific questions on the precise costs by claiming not all the costs are in yet). Seperately NAMA had administrators appointed to companies in the Beetham Organisation in the UK which was developing commercial space on the edge of the City of London. It was reported that there were some €5bn of NAMA “objector developers”, understood to be mostly from Northern Ireland and which included Paddy McKillen, who didn’t want their loans transferred to the Agency created by the Dublin government. In a portent of the loss to come, it is announced that NAMA will not pay interest on its subordinated bonds which it used to fund 5% of the acquisition price of loans. NAMA confirms the sale of the Montevetro building to Google for €99.9m, and it is exclusively reported on here that NAMA scores a success when loans on an apartment development building in London’s Grosvenor Square is to be refinanced by British tycoon Richard Caring. Fine Gael looks set to form next government after winning most seats in the General Election on 25th February, and major changes were expected for NAMA given the commitments and statements made during the campaign – in the event, none have yet to leave the drawing board.

March 2011

It was reported that NAMA had sold the former Liam Carroll HQ on Parnell Street to Penney’s for €25m. Fine Gael and Labour enter into a coalition agreement and further loan acquisitions, specifically the sub-€20m exposures at AIB and Bank of Ireland – by NAMA are scrapped. Anglo’s CEO, the €974,000-a-year Australian Mike Aynsley takes a pot shot at NAMA’s “execution” in an interview with an Australian newspaper. NAMA wins a key court case in the UK where it is held that the Carey group cannot prevent the Agency taking over its loans. NAMA awards an IT contract to Ergo Services to deliver a “portfolio management system”.The NAMA chairman, Frank Daly delivers a speech to the, ahem, Licensed Vintners Association in which he claims that residential property had declined by 50% from peak when NAMA valued it by reference to 30th November 2009. Veteran gentleman developer, Paddy Kelly became the first of many prominent scalps to be claimed by NAMA and its receivers in 2011, as NAMA appointed property receivers to 11 assets principally associated with the Laois-born developer.

April 2011

It is reported that NAMA has started investing in Irish government bonds. Just a treasury management exercise claims NAMA but given the volatility of Irish bonds in 2011, many felt NAMA was going off in on a dangerous tangent. As it happened, NAMA sold the bonds a few months later and made a profit. NAMA touted the concept of providing some form of mortgage assistance to residential buyers to get around the moribund domestic housing market, the concept later transmogrified to the negative equity mortgage product which NAMA is set to launch imminently (it’s been deferred at least once, and it is known that the Government has expressed reservations about its potential to distort the housing market). It was reported that NAMA had sold a shopping centre in Blackpool in northern England for €112m – half the size of Dundrum Town Centre but with a similar footfall, yet Dundrum was said to be worth more than €500m.NAMA appoints receivers to Derek Quinlan properties. Minister for Finance Michael Noonan bamboozles us by claiming that NAMA will not be taking over sub-€20m exposures at AIB and Bank of Ireland because the “assets would be geographically scattered”. NAMA appoints receivers to Capel Developments. And another of the Celtic Tiger’s roaring personalities, Jim Mansfield succumbs to NAMA’s receivers also. The P Elliot group follows the descent into receivership soon after. On 27th April, NAMA initiated a saga with the Grehan brothers from Galway, as it appointed receivers to companies and assets in Ray and Danny’s group, reportedly after relations soured between the developers and NAMA when NAMA sought to have Harry Slowey appointed to a role in the Grehan group. This foreclosure in particular has been the most bitter, eventful and problematic to date, with personal judgments, worldwide court orders and Ray Grehan becoming the most vociferous critic of NAMA with attributed comments in newspapers and an appearance on an RTE Prime Time special on NAMA. Finishing off April came news of yet another receivership, this time to a landmark €225m property onLeicester Square inLondon belonging to Pat Whelan’s Steamboat Developments.

May 2011

May started with the latest episode of the Grehan saga and NAMA “standing down” its receivers whilst giving the brothers 24 hours to come up with a few hundred million euros. NAMA published its management accounts for 2010 which indicated the final loss for that year would be €1bn; the view on here was that the true loss should be higher but thanks to accounting considerations, NAMA was able to avoid the full horror of declines in property/security values after its valuation date of 30th November, 2009. In one of the year’s lighter notes, Tom Barry the Fine Gael TD from Cork accused NAMA of saying , to quote the politician verbatim, “let’s kill the whole lot of these pigs and get rid of them” – NAMA wasn’t talking about recalcitrant developers but allegedly was talking about a pig farm owned by one of the Agency’s debtors. After April’s receivership bloodbath, it was reported that NAMA was seeing “a marked increase in the level of co-operation between NAMA and its clients in light of its recent enforcement actions”. NAMA donates a €300,000 painting, formerly in Derek Quinlan’s collection, to the National Gallery of Ireland having decided as “a goodwill gesture to the National Gallery and to the Irish people to offer the National Gallery one piece of art from the collection for free given the fact that they advised it was of importance to the heritage of Ireland” NAMA adds flesh to its negative equity mortgage product. Concerns are raised here that NAMA is concentrating on disposals in the London market which might be counterproductive in the longer term. Whilst NAMA has moved against some developers, it is supporting others and Sean Mulryan and his Ballymore group is understood to be a favoured recipient of NAMA’s largesse as it announces a major development in London’s docklands.

June 2011

NAMA announces outline details of its controversial incentive scheme for developers whereby the Agency and the developers personally will benefit from profits. In an unbelievably stupid gaffe within earshot of attentive British and Northern Irish politicians, An Taoiseach Enda Kenny tells journalists he has concerns about shenanigans in NAMA’s disposal of assets, and retracts his comments two days later having inflicted a nice little scar on NAMA’s reputation. There is a little more light relief as speculation emerges that certain top judges are in NAMA, and there are concerns at those same judges’ impartiality in property related matters. There is credible speculation that NAMA is considering selling its US portfolio of loans in packaged bundles, something that might return to the public arena in 2012. Not for the first time, there is unease about prices being achieved on NAMA property in the UK, and questions arise as to why NAMA is seemingly getting the lower end of expected price ranges in its disposals. Another foreclosure saga kicks off when it is exclusively reported on here that NAMA has appointed receivers/administrators to assets owned by David Daly and family. One of NAMA’s Top 10 developers, Treasury Holdings is surprisingly upbeat in the annual report of group company REO which owns the Battersea Power Station despite having €1bn of negative shareholder equity. Battersea has had a difficult history but had secured full planning consent at the start of 2011, and looked set to be developed at last having been derelict for nearly 30 years; alas, it was not to be and in December, administrators were appointed to the 38-acre site which is now on the market. The NAMA chairman appears on RTE radio and concedes that only one developer business plan is “close to finality” NAMA developer, Niall Mellon gets off his cross for five minutes to tell RTE radio that “money is not” his god, and gives some insight into the lot of a developer’s dealings with NAMA.

July 2011

News that NAMA is recruiting a political lobbyist raised some eyebrows. There was a shock decline in Irish commercial property of 5.7% in Q2 of 2011, partly in anticipation of Government moves to abolish Upward Only Rent Reviews in pre-February 2010 leases but also in part reflecting the absence of financing and the anaemic economic environment; for NAMA whose portfolio includes loans of some €9bn relating to commercial property in Ireland this is very bad news indeed. The Paddy McKillen court saga concludes with a costs hearing which sees NAMA footing the bill for the entire case, estimated at some €7m. Receivers are appointed to assets controlled by the Baron of Ballsbridge, the Dunner, Sean Dunne – Sean is publicly philosophical but the extensive personal guarantees may yet become big news. If evidence was ever needed of the bitter relationship between the Grehan brothers and NAMA, then it came on 25th July as NAMA sought personal judgments totalling €600m against the Grehans, and news emerged that the brothers were personae non grata at former properties including the Glenroyal hotel. There is an announcement that NAMA sold 58 apartments at the luxurious Beacon South Quarter development in Sandyford, south Dublin which had been developed by Paddy Shovlin; the sale was to the Cluid Housing Association, NAMA uses the occasion of publishing its 2010 annual report with a €1.1bn loss to publish its first list of foreclosed properties – judging by the 48,000 hits on the list on this blog, there was considerable worldwide interest in what NAMA controlled. The Wikileaks leaking of the contents of US messages sent by its embassies around the world reveal that Secretary General at the Department of Finance had allegedly “hinted” that the haircut on NAMA loans could be 50% in April 2009.

RTE broadcasts a Prime Time special NAMAland which rambles on about the project for 35 minutes but does feature a rare developer interview with Ray Grehan suggesting he will depart Ireland in search of better prospects because of NAMA’s approach to dealing with debtors. Politicians at last lose their fear of NAMA as it is announced that Independent TD Stephen Donnelly has written to the Agency about Greystones harbour, it is shortly thereafter revealed that NAMA has set up a special phone number and email address so that TDs and senators can get preferential access to the Agency. NAMA announces that it has agreed the disposal of €4bn of “assets” – loans and property. In a series of hearings on the banking and financial crisis, NAMA appears before the Committee of Finance, Public Expenditure and Reform. TDs and senators get a master class in communication skills as NAMA succeeds in deflecting difficult questions and suppressing potentially embarrassing information. It is revealed that NAMA is lending some €10m to Fingal council to help build a road which will presumably add value to a NAMA asset. It is exclusively reported on here that NAMA is to offer One Warrington Place in south Dublin Docklands for sale with staple finance – that’s where NAMA loans up to 70% of the value of a property to the buyer; the architecturally interesting David Arnold office block which is rented to Bord Gais is understood to have now sold to Prudential for €28.4m just before Christmas. NAMA reports that it has redeemed another €500m of its bonds, bringing the cumulative total to €1,250m . The Belmayne development in north Dublin which came to epitomise property porn in its advertisement posters during the boom is now being marketed with a rent-to-buy option. NAMA says its negative equity mortgage product will be launched in Q4, 2011 (later deferred and now expected some time in 2012). NAMA scores a bulls-eye when it sells €800m of loans in the Maybourne group of hotels (Claridges, the Connaught and the Berkeley) to Frederick and David Barclay of the Telegraph newspaper and Ritz hotel fame, the loans were said to have been sold at their original par value and NAMA made a profit because it acquired the loans at a discount. Although Paddy McKillen was not happy with the deal and has launched legal action in theUK to allegedly protect his interests, it is a done deal as far as NAMA is concerned.

October 2011

Developer and impresario – and recipient of cufflinks from Queen Elizabeth II in thanks for his contribution to the successful state visit in May 2011 – Harry Crosbie roughens a few feathers when he tells Brendan O’Connor on RTE television that “in four years time we’ll be flying and buzzing and we’ll have paid back everyone and we’ll be laughing” The public was not amused and I don’t think NAMA was either. After a couple of months hiatus, NAMA resumes its foreclosure action with the appointment of receivers to two small-scale Cork developers. Soon to resign Minister for Housing, Willie Penrose arguably oversteps the mark by demanding NAMA do more to address social housing needs in the country – a fine sentiment but what Willie seemed to be demanding was cheap housing so that he could deliver on his departmental savings and avoid much-needed reforms, or at least that was one interpretation. NAMA takes control, through administrators, of some of Belfast’s best loved watering holes when it moves on a company controlled by Sean Lyne and Noel Connellan. The most prominent Northern Ireland member of the NAMA board suddenly resigns, and in a statement issued on his behalf Peter Stewart makes reference to the Geoghegan review and a watershed moment in NAMA’s evolution. Although reported as a NAMA development by the Irish Independent, it has not been conclusively established that Church Hill in Tullamore in County Offaly is in fact in NAMA, but it nonetheless made fascinating reading when it was reported that a squatter had moved into an empty house on the estate and a local judge had refused to kick him out. It is reported that NAMA has at last sold “Britain’s most expensive house” when Updown Court and an adjacent cottage fetch a reported €40m. Although the development is not in NAMA, the developer is and news that residents of Priory Hall apartment complex in north Dublin had to evacuate their homes due to building defects and fire risks was big news which continues with residents still living in temporary accommodation, Dublin City Council taking legal action to avoid liability, threats of jail for the developer Tom McFeely and NAMA seizing the opportunity to rent some its empty homes at arms-length market prices. Commercial property drops 4.2% in Q3, 2011 exacerbating NAMA’s problems with impairment losses on its security. Prominent hotelier and developer, Alan Hanly sees receivers appointed by NAMA to various properties. On 24th October, Judge Kelly ruled that it was permissible for NAMA to sell property under its control to associates of developers, this was a side issue in the judgment order against Jim Mansfield but might take on significance in 2012 as NAMA intensifies disposals in Ireland. It was a nervous Brendan McDonagh who appeared before the Oireachtas Committee of Public Accounts, with the nervousness evidenced by his almost OCD repetition of the word “effectively” but again very little was learned and it remains a fact that NAMA disposes of an average of €500m of property per month, every month and the public and indeed political oversight committees know very little about the detail of such disposals.

November 2011

It is reported that NAMA has taken possession of an art collection formerly owned by developer and lawyer Noel Smyth, possibly best known for being associated with the Square shopping centre in Tallaght. And as 2012 came to a close there seemed to be a ramping up of activity relating to his UK investment vehicle Alburn Real Estate Capital CMBS, with changes to bondholders and existing bondholders getting antsy about the repayment of their debt and the future of the fund. NAMA is reported to be investigating a link between an employee and a developer – the employee being Colm Lundy and the developer being Newlyn; there’s not been any public conclusion to any investigation yet. We get some light relief when the judgment in the Sean Dunne/Gina Farrell case is finally published; although Sean could be said to have been on the winning side and to have been vindicated in the justice of the case, NAMA was accused of effectively funding an unfeasible court case. Not for the first, and probably not the last, time NAMA is accused of subsidising loss making hotels which place the futures of traditional hotels in jeopardy; this time the accusation comes from Failte Ireland though NAMA insists that its impact on the hotel sector is exaggerated and that it is a relatively small player in the bank controlled hotel sector with Bank of Scotland (Ireland) being reputedly the biggest player. Another one of the “good” developers, John Fleming emerges from bankruptcy in England and faces an uncertain career future but at least he can draw a line under his 1bn-odd debts. The day after John emerged from bankruptcy, another “John”, this time John Ignatius Quinn (or “Sean” Quinn as he is known to Anglo) filed for bankruptcy in Belfast. Although not reputedly in NAMA, Sean’s example of seeking bankruptcy outside this jurisdiction is likely to be copied in 2012 regardless of any changes to the personal insolvency regime. NAMA benefits from the auctioning of Derek Quinlan’s art collection at Christie’s sales in New York and London, and is also understood to have benefited from a Goff’s auction of racehorses where developer Michael Ryan’s foal from “See the Stars” fetched €800,000. The BBC broadcast a vanilla programme on NAMA and its role in Northern Ireland. NAMA loses a second director in two months, this time arguably its most senior banking man, Michael Connolly; there is no statement from the departing Michael and NAMA issues a bland statement. NAMA absolves the Dublin Docklands Development Authority of future liability on loan commitments in respect of the 25-acre Irish Glass Bottle site in Ringsend, in return for certain properties, the value of which is not disclosed.

December 2011

In what may be the first of many, NAMA is understood to have sold a portfolio of loans relating to UK developer, Cyril Dennis. The price tag was said to be GBP 280m (€326m) and the buyer Orion Capital Partners. Budget 2012 sees the abandonment of the Government’s manifesto commitments on Upward Only Rent Reviews in commercial leases, and the reduction of commercial property stamp duty from 6% to 2% and range of property incentives. The uninspiring Geoghegan review of NAMA is published and it is announced that Minister Noonan is to create a quango which will advise the Minister on matters relating to NAMA – the “advisory board” will require a Direction pursuant to the NAMA Act and we still wait to see the text of that Direction and its compatibility with the European Commission decision approving the NAMA project. NAMA appoints receivers to yet more small-scale developers, Banna Holiday Villas and Cloonbeg Developers and to a mid-sized developer, Cleary Doyle. The NAMA v David Daly saga came to an apparent end with the announcement of a settlement and the sale of properties on London’s New Bond Street and the refinancing of remaining loans. Earlier in the year, NAMA had advertised for investigators to verify developer’s statements on assets and liabilities, in December, NAMA decided to get heavy and advertised for a panel of private investigators. NAMA was dragged into the Vita Cortex dispute in Cork where 32 workers were made redundant at a company connected to developer Jack Ronan. The workers weren’t paid redundancy and NAMA was portrayed as a Scrooge because NAMA did control a bank account in a sister company but that money is according to NAMA, secured on loans. On the eve of the seasonal break, it was announced that NAMA was to make up to 2,000 homes available for social housing in 2012, but it seems Minister for the Environment, Community and Local Government, Phil Hogan got ahead of himself with his announcement – NAMA has only foreclosed on a fraction of 2,000 homes in Ireland, its developers still have discretion over the disposal of assets and any social housing arrangement will be on an arms-length commercial basis. .

Anglo Irish Bank chairman, Alan Dukes certainly upset a lot of people yesterday. His bank announced record 12-month Irish corporate losses of €17.6bn, which upset the entire nation. He gave a presentation at University College Cork to the Association of Compliance Officers in Ireland and the Financial Services Innovation Centre where he claimed that Irish banks need another €50bn of state injections on top of the €46bn already shoveled into the banks (to be clear that extra €50bn includes the €35bn of the IMF/EU bailout earmarked for the banks). That claim upset the Department of Finance and is at odds with the governor of the Central Bank of Ireland who claims that an extra €10bn for the banks should be sufficient. Alan Dukes also said that NAMA would need €75bn of funding, considerably more than previously understood. NAMA is reported to have responded with a statement (though alas it is not available from the NAMA website yet) to the effect that Dukes’ claims were rubbish and that the agency would only need €37bn to acquire its intended portfolio of loans. The agency has already acquired €71bn of loans at par or nominal value (which was also the position before Christmas). It seems that there is another €5bn of €20m+ exposures to be transferred (which will presumably include Paddy McKillen’s €2.1bn) and that there is some €12bn of sub-€20m exposures at AIB and BoI. This €12bn sub-€20m total at AIB and BoI seems to reflect the success of the lobbying by AIB to exclude associated lending from the sub-€20m transfers, because the previous estimate of these smaller loans was €16.6bn. For interest, NAMA told the Supreme Court today that it has had discussions with the European Commission and seem to have approval to a slippage to the end-of-February-2011 deadline to absorb all loans.

So just to remind ourselves, here is the history of NAMA’s estimates of its ultimate loan portfolio, both the nominal value and how much NAMA would pay for the loans.

(4) Minister for Finance, Brian Lenihan announcement on 30th Sept, 2010 which said that sub-€20m exposures at AIB and Bank of Ireland were not to be transferred to NAMA. Previously the threshold for these two banks was €5m.

(5) IMF/EU bailout and the decision to include all land and development exposures at AIB and BoI, that is the €20m threshold was removed. An estimated €16.6bn of sub-€20m loans at AIB/BoI were to be absorbed.

This morning at 11.30am in Committee Room 1 (you will be able to view proceedings live here – remember Committee Room 1) NAMA will be quizzed again by the Committee of Public Accounts. You’ll remember that NAMA was last before the Committee on 18th November, 2010 and the specific reason the agency is being brought back is to answer follow-up questions on the issue of information provided to NAMA by the banks in 2009 – before Christmas there was a flurry of activity in this area with reports of Garda involvement and exchanges between NAMA, the Financial Regulator and the Committee which led to the Committee feeling it had been misled by some responses from the NAMA CEO, Brendan McDonagh in November.

So expect some fireworks this morning. The Committee may take advantage of the session to ask other questions of NAMA separate to the core issue of the banks’ provision of information in 2009. There will be reporting and analysis here later.

There are previous entries on the subject of today’s proceedings, including copies of Committee correspondence, here and here and here.

Here’s the summary of the three hour hearing. A transcript will be posted when it becomes available.

(1) With respect to the banks misleading NAMA, it seems that NAMA has won the buck-passing competition with the Financial Regulator. NAMA referred to a letter received yesterday at 5pm (and NAMA repeated the 5pm timing a few times to emphasise the action by the Financial Regulator late in the day and against a scheduled Committee hearing today). It seems that the Financial Regulator is seeking information from NAMA and will be taking the lead in progressing any investigation into misleading information being provided to the agency or more particularly to the stock exchange.

(2) NAMA claim that they can only act on information received after the NAMA Act came into law in November 2009. For acts before then, NAMA just doesn’t have the locus standi. If NAMA had accepted the loans at the values suggested by the banks in August 2009 then NAMA would have overpaid by €20bn. Also if the true scale of losses was known there might have been a different policy response though the claim was that Peter Bacon’s earlier report recommended an asset management solution without quantification.

(3) Whilst banks may have misled the Stock Exchange that is a matter for the Financial Regulator it seems. If banks sought to mislead the government so as to remain independent then that, also, is not a matter for NAMA. It seems game, set and match to NAMA in passing the buck to the Financial Regulator.

(4) Personally I thought NAMA got away very lightly because NAMA had previously claimed it was effectively misled with information which formed the basis of its draft Business Plan. And there was no challenging of NAMA’s due diligence of that draft Business Plan. So in that respect the Committee was lightweight. And NAMA might breathe a sigh of relief.

(5) Whilst declining property values, the finalisation of the NAMA valuation methodology and additional equity release may have increased the Loan-to-Value metrics between August 2009 and when NAMA valued the loans, it was the NAMA CEO’s view that these aside the LTVs should have been in the order of 100%, rather than 77% as claimed by the banks. NAMA provided the detail of the LTVs provided by the banks as follows:

(a) AIB 70%
(b) Anglo, 66-69% for land, 65-70% for development and 75-80% for investment
(c) BoI 66-70% (BoI apparently referred to a 69% LTV in its stock exchange release)
(d) EBS, 69% for land, 100% for development and 68% for associated lending
(e) INBS, 94% for land, 98% for development and 89% for associated

The NAMA CEO’s view was that the weighted average LTV should in fact have been 100%

(6) To the end of December 2010, NAMA had absorbed €71.2bn of loans at par value. In addition Paddy McKillen’s loans amount to €3bn (up from previous estimates of €2.1bn) and in addition there will be some €13bn of €0-20m exposures to absorb (not €16bn). It was not clear from the answers if there will be additional loans which are presently being contested by the banks.

(7) The average haircuts to the end of December 2010 were a little below previous estimates (in brackets) with AIB at 54% (60%), BoI at 42% (42%), Anglo 62% (67%), EBS 60% (60%) and INBS at 64% (70%). Additional tranches may alter these haircuts.

(8) NAMA has reviewed 30 business plans and 13/14 “have moved” to the Memorandum of Understanding Stage. The Committee did not really get to grips with whether any MoUs had been signed by both NAMA and developers. After the MoU stage, there will be Heads of Terms and then a Legal Agreement. So it seems that NAMA is still some way off having agreed business plans despite absorbing the first tranche of loans over eight months ago on 10th May, 2010.

(6) With respect to spouse transfers, NAMA can use four legislative tools (a) section 211 of the NAMA Act for transfers after 21st December, 2009 (b) the 2009 Land and Conveyancing Reform Act for transfers after 1st December, 2009 (c) the 1634 Conveyancing Act which allows NAMA to go back indefinitely (and certainly the “dozen years” that will be relevant here) and (d) if the developer is bankrupt there are provisions in the bankruptcy legislation to have transfers set aside. The NAMA Act is the easiest tool for NAMA as they don’t need show intent – the other Acts require NAMA to prove the developer was insolvent and an intent to defraud creditors.

(9) NAMA has taken legal action against one developer to void transfers and the details of that action will come into the public domain on Monday next, 17th January.

(10) It seems that Brendan McDonagh might have had some media training or else he has been studying Tony Blair’s handling of difficulty questions. If I had a euro for every time he responded to a question with “all I can say to you” (in other words he may not agree with the questioner’s question or answer it comprehensively but he will set out his narrower understanding) I think I would have about €20.

(11) The Committee were not happy that some of the contents of a letter received by it on Monday 10th January, 2010 were featured in the Sunday Business Post which ran an exclusive on the NAMA CEO’s salary (€430,000 + 60% max bonus). NAMA hasn’t paid bonuses *yet* for 2010 and the NAMA pension scheme provides 1/80th of final salary for each year of service.

(12) The section 2 penalties in the NAMA Act for developers providing deliberately incorrect information (€5m and or up to 5 years imprisonment) might not be adequate to prevent developers taking a punt on NAMA not finding out about transfers given the value of developer properties.

(13) Developer Michael O’Flynn might have some questions to answer in respect of personal guarantees on his loans. NAMA claim that *all* of the Top 10 developers (not named but there has been widespread speculation that the Top 10 includes Michael O’Flynn) have given personal guarantees on *some* of their loans. The NAMA CEO was careful to state that he was not referring to any individual developer when making that statement. But if Michael O’Flynn has given personal guarantees then why does he still have the AgustaWestland helicopter. Of course it might be that Michael O’Flynn’s loans are all performing or the helicopter is ringfenced in a limited company or he mightn’t be in the Top 10.

(14) NAMA’s Head of Lending, Graham Emmet’s comments about NAMA being a liquidation vehicle do not reflect NAMA’s position. Brendan McDonagh had a word with him…

UPDATE: 21st January, 2011. Cork Developer and NAMA Top 10 borrower in Tranche 1, Michael O’Flynn is reported to have written to the CPA to assert that his loans are not subject to personal guarantees as claimed by the NAMA CEO. This letter of Michael O’Flynn’s seems to have generated further correspondence from the CPA to NAMA asking for comments on Michael’s claims and the response printed in today’s Irish Times is “nevertheless, Mr McDonagh chose his words carefully when addressing the committee on this issue [personal guarantees] and he stands over those comments now”. Let’s remind ourselves of the words used by the NAMA CEO which are now available from the Oireachtas transcript.

The Irish Independent today makes clear something which has been alluded to in previous reporting but which has hitherto been shrouded in vagueness. Emmet Oliver claims that the Independent has seen a “document” (presumably a letter) written in May 2009 by the Central Bank of Ireland governor, John Hurley (Patrick Honohan’s predecessor) and the then-acting CEO of the Financial Regulator, Mary O’Dea.

According to the Independent, the letter to the banks gave an undertaking that new lending from April to November 2009 which was NAMA-eligible (remember that NAMA was only supposed to take loans created before 31st December 2008 and additional advances on those original loans eg to complete projects). The letter hamstrung NAMA by compelling the agency to accept this additional lending, estimated at €1bn, without applying a haircut. In the event NAMA succeeded in rejecting half of the €1bn because of unacceptable security. If NAMA had applied its average discounts so far then it would have acquired the €500m of loans for €210m – an implication from the Independent article is that NAMA overpaid by €290m.

The background to this episode was that banks were fearful of making additional advances in 2009 if these advances were to be subsequently acquired by NAMA at a discount and the Central Bank/Financial Regulator wanted to avoid a liquidity crisis with existing developer loans by giving the assurance of “no haircut”.

The previous reporting on this matter was in the Comptroller and Auditor General’s (CAG) first report on NAMA in November 2010 which said “following direction by the Governor of the Central Bank and Financial Services Authority of Ireland and the acting CEO of the Irish Financial Services Regulatory Authority, no discount was applied to advances made by banks to borrowers after 7 April 2009 provided that it could be shown that the moneys were advanced as part of normal commercial banking arrangements. For loans that transferred in the first tranche, NAMA accepted that €299 million of those loans, issued after 7 April 2009, qualified for payment in full.”

The EU gave approval to the NAMA project in February 2010 and the published decision described NAMA’s valuation methodology in some detail. There is no reference whatsoever to any letter or commitment to ignore the valuation methodology for certain loans. Presumably a commitment to pay in excess of the loan’s value (using NAMA’s own valuation methodology) would constitute additional state-aid and would necessitate EU approval.

The EU has given its approval to the valuation of NAMA’s Tranche 1 and 2. Tranche 1 included €299m (according to the CAG report referred to above) so presumably the EU has given ex-post approval to the additional state-aid but shouldn’t that approval have necessitated something more formal and public, particularly since NAMA seem to have departed from the terms of the approval given by the EU in February 2010?

The Independent refers to an exchange between NAMA’s CEO, Brendan McDonagh and Minister for Finance, Brian Lenihan in June 2010 (the Independent refers to June 2010, not June 2009) where Brendan reportedly said “there are certain monetary consequences arising from implementation of this direction”. You would have to ask why NAMA didn’t invoke section 84(1) of the NAMA Act which states “NAMA is not obliged to acquire any particular, or any, eligible bank asset of such an institution on
any grounds.” The NAMA Act provides for the Minister issuing directions to the agency and such a direction could include an instruction to acquire certain loans but no such direction appears to have been issued (NAMA published ministerial directions in October 2010 and they were the first such published directions)

So two questions emerge from this affair – why didn’t the EU flag this extraordinary state-aid and why did NAMA not invoke its right to reject this lending on which it was forced to pay an additional premium?

Despite criticising the Comptroller and Auditor General’s (CAG) report on NAMA last week as incoherent and aimless, it does contain some interesting information. And aside from the payments (bizarrely including VAT) made to some third party companies, the detailed worked example of a NAMA valuation of a loan is possibly the most interesting nugget in the entire report. This entry examines the worked example.

The worked example looks horrendously complicated when you consider what the objective of the valuation is: to figure out (1) what the property was worth at 30th November, 2009 (2) what it is worth long term and (3) deduct a sum for due diligence and enforcement as these are costs NAMA is incurring. I would have expected the 5.25% due diligence and enforcement to be calculated on the par value of the loan but the worked example shows that it is calculated on another (much lower) figure. I am also confused by the calculation of the current value of the loan and why it makes use of a different discount rate (for which I can find no support in the various legislation and EU Decision). So for the time being I present what the CAG has presented with some better explanation but this is a post to which I expect to return.

The worked example appears at Annex A to CAG’s report from page 49 on and consists of three pages – the worked example, explanatory notes and a graphic illustrating the calculation of the “state aid” element within the NAMA payment for the loan. The “Asset Acquisition Process” in Chapter 2 of the report (pages 29 onwards) provides further explanation as to how some of the rates have been derived. The worked example relates to an investment property loan.

Here’s the worked example.

Here’s the explanatory notes.

Here’s the graphic showing the State aid element of the payment.

The explanatory notes are not very explanatory in my view and I have set out below the components to the valuation.

(1) The loan balance is the sum outstanding on the loan – straightforward enough. NAMA of course needed to do a reconciliation between when the valuation was undertaken and when the loan was transferred (additional interest, repayments, additional advances). In this case we assume the loan valued doesn’t change.

Derivatives can be confusing creatures. In this case let’s assume the “derivative” of €2,955,704 is an interest rate swap. What’s that I hear you say? Okay, let’s assume the developer took the loan out a couple of years beforehand. At the time the bank was insisting on an interest rate equal to the ECB main rate plus 2%, in other words a variable interest rate as is usual. At the time the main ECB rate was 3%, so the developer would have been paying 5%. The developer though was concerned that interest rates were going to rise and if they did then he might lose his profit on the development. So he wanted to lock in his interest rate, pretty much like a fixed rate mortgage. So he bought a “derivative” from the bank fixing the rate at 6% and that’s what he is supposed to pay. Now of course the ECB rate came down to 1% so it wasn’t a good deal for the developer and now in addition to the outstanding loan, he owes a further €2,955,704 on the derivative. Now if interest rates had shot up to 7% then the bank would owe the developer.

(2) The Current Market Value (CMV) of the property on 30th November, 2009. What would the property fetch on the open market at that date.

The Long term Economic Value (LEV) of the property is the CMV increased by a subjective % by the valuer to reflect the long term value of the property based on a number of considerations (which are set out in sections 5 and 6 of the LEV Regulation) which are subjectively interpreted by the valuers.

The Standard Discount Rate in the example is 5.57% comes from section 2(2) of the LEV Regulation “the NAMA 5-year discount rate, for bank assets denominated in euro or any other currency, is 5.57 per cent (which includes a risk margin of 1.7 per cent)” Why 5 years? That comes from 7(b) of the LEV Regulation “where the bank asset is a bank asset for which the security is land for which the adjustment factor is more than 10 per cent of the land’s value but less than or equal to 15 percent of that value, NAMA shall take into account the projected cash flows of the bank asset over a period of 5 years using the NAMA 5-year discount rate,” Why is the adjustment factor 15%? Well that’s going to be a subjective assessment by the valuer based upon the factors set out in sections 5 and 6 of the LEV Regulation but I think it is worth noting that NAMA engaged a British consultancy, London Economics, to report on likely property trends in key NAMA markets and “the report concluded that the range of implied property price changes (in nominal values) for the period 2010 to 2016 for a combination of commercial and residential property was Ireland – 17.7% to 28.8%, UK – 14.7% to 20.3%, US – 10.5% to 23.7% (page 38 of the CAG Report). In addition to a valuer working out the CMV at 30th November, 2009 (what would the property sell for at that date on the open market on the basis of a willing buyer and willing seller, both in possession of perfect market knowledge), the valuer is required to look at cash flows on the property in the relevant period (5 years here because of the above)

(3) The loan collateral valuation is what NAMA actually pays the bank for the loan and is calculated using three components (it seems derivatives are valued at zero)

(i) the LEV of the property expressed in current terms by applying the Standard Discount Rate in (2) above of 5.57% and

(ii) then deducting 5.25% representing the costs that NAMA will incur in undertaking due diligence of the loan (0.25%) on acquisition and the predicted average costs that NAMA will incur in enforcing loans (5% – the standard enforcement fee is supposed to be 15% but NAMA convinced the EU that less than a third of loans would require enforcement) plus the cashflow from the property discounted using the discount rate in (2) above, that is 5.57% in this case.

(iii) and adding the present value of the future cash flows discounted by the Standard Discount Rate

(4) The haircut (or discount) is the difference between the value of the loan (including derivatives) on the bank’s books and what NAMA actually pays. So the difference between (1) and (3) above. The haircut % is the haircut divided by the value of the loan (including derivatives) on the bank’s books. The haircut shown in the example is 30.02%. In reality the haircut on Tranche 1 total was 50% and Tranche 2 total was 56% and the weighted average in Tranches 1 and 2 was 52%. So the example shows a relatively high valued loan.

(5) State-aid has not really cropped up in discussions up to now in the context of the detailed valuations but CAG put a number (quantum and %) on it – basically it’s the difference between the Collateral Current Market Value (from (3) above) the Loan Current Market Value. And this would be where the CAG lost me. It refers to the CMV of the collateral (€62m), the future rental income (€3.7m in 2010 and 2011 and €5.7m in 2012, 2013 and 2014). And then there is a discount rate applied. This discount rate of 11% is different to the Standard Discount Rate and seems to be a NAMA invention and is shown on page 44 of the CAG report and I reproduce the table here.

I am still lost as to how the CAG arrives at a value of €50,391,460 based on a CMV of the loan collateral of €62,000,000 and future rental income of €3.7-5.7m per annum. Plainly the figure arrived at is less than the CMV of the loan collateral which is partly why I’m confused.

So there you have it. I must declare that I have valued property before so what the CAG presents should not be alien to me, but I must also admit that the calculation of State aid (and in particular the CMV of the loan) is puzzling to me. I expect to return to this entry in future with clarifications.

Ever since the NAMA announcements in respect of the first tranche of loans on 30th March, 2010, there has been debate about how NAMA calculated the Long Term Economic Value, the Current Market Value and the consideration paid. The summary of the figures from NAMA on 30th March, 2010 are shown here. It should be stressed that the Anglo numbers are estimates and subject to audit and the latest from NAMA is that it may be several weeks before Anglo’s first tranche loans are transferred.

The NAMA Act and the LEV Regulations give some overall guidance as to how the CMV and LEV are calculated. However debate flowed, for example on the irisheconomy.ie website as to how the consideration paid was derived. There was also intense debate about the “haircut” or the discount being applied to NAMA loans as it was felt this would indicate the NAMA floor for CMVs and may point to where the property market will bottom out.

With respect to the last point, NAMA is expected to purchase €16.03bn of loans in the first tranche. It is not known whether these loans include rolled-up interest or to what precise assets they relate to (though in aggregate terms we know from page 2 of the NAMA first tranche press release that of the projected €8.5bn payable as consideration payable that €5.5bn was classed as “investment property”, €1.3bn classed as land including land where development was less than 30% complete, that €0.8bn was classed as hotels, €0.5bn as land where development was more than 30% complete and lastly €0.4bn was classed as residential property for resale). However IF

The first loans related 100% to residential property

The first loans include the same proportion of loan and rolled up interest as indicated in the draft NAMA business plan (ie €68bn of loans and €9bn of rolled-up interest)

The first loans were granted at a Loan to Values of 77% as indicated to be the estimated overall LTV in the draft business plan

The first loans are representative of the loans, LEVs and CMVs in the planned subsequent transfers.

The first loans were on asset values which were in proportion to the aggregate asset values in the draft NAMA business plan (ie values at origination of €88bn, implied peak values of €120bn) – note that the implied €120bn is rarely referred to in the media which often refers to the €88bn as being the peak value with the curious implication that every single NAMA loan was taken out during one month in 2007! I cite as a source a statement from Brian Lenihan in the Dail on 12th November, 2010 when the following exchange took place between FG Deputy Kieran O’Donnell (the full record of the day’s exchanges are available here) :

Deputy Kieran O’Donnell: Did the Minister look into the legal structures of the banks in terms of offshore subsidiaries, where those offshore subsidiaries are located and whether there are legal disclosure requirements in respect of those countries? The figure of €120 million as the gross loan book was mentioned by the Minister on a number of occasions. That loan book transpired to be €77 billion. That is a difference of €43 billion. That is a 36% shortfall which is significant and requires explanation.

Deputy Brian Lenihan: The €120 billion included was a notional figure, based on the value of the collateral at peak; it was not a book value. It added to the book value the actual peak value of the property in measuring the decline since. This is important. This was part of the debate before NAMA but it was never suggested that this figure was the actual book value.

THEN

NAMA is placing a current market value (CMV) of €45bn (€16.03/77 * 68 = 14.2; 68/14.2 * 1st tranche CMV 9.44) on assets that were worth €88bn at origination and €120bn at peak, in other words NAMA is valuing at 62% off the peak value. The original NAMA business plan was accompanied with the message that NAMA had to see a 10% total rise in asset values over 10 years to break even (IF THE NAMA LOAN DEFAULT RATE WAS 100%, NOT 20% AS IN THE DRAFT BUSINESS PLAN, AND THAT INSTEAD OF RECOVERING LOANS FROM BORROWERS NAMA HAD TO SELL OFF THE ASSETS).

The following is a copy of an email exchange with NAMA which throws some light on the calculation of the consideration paid. It would appear to this author that the “potential legal haircut for defects in title or security” will only be known to NAMA and there may be other inputs to the calculation as well.

In respect of communication with NAMA, it is probably worth remembering Enda Kenny’s statement in the Dail on 23rd March, 2010 when he questioned how NAMA could operate with 65/70 people when Goldman Sachs were managing a similar scale of asset value with 3,000 people. No doubt they are very busy people indeed and I have redacted the name of the person at NAMA who provided the information but as shown on NAMA’s own website they have a general email address of info@nama.ie. I suppose it’s also to be borne in mind that NAMA has many critics, some of whom might use any information from NAMA in a deliberately malign way.

So said Brian Lenihan in the last hour in a press conference making reference to the NAMA press conference earlier today. Why the consideration paid by NAMA is less than the Long Term Economic Value is unclear at this point – presumably if another party has a first charge then that might reduce the consideration paid. This is very important arithmetic and no doubt this point will be considered in the coming days.

Much has been made today of the 47% haircut (46.5% to be precise but given that Anglo is an estimate the point is moot) but is the truth that the haircut is 34% (€10.51bn LEV cf €16bn loanvalue)?